Good morning,

The Chancellor’s new job retention scheme has been largely well received. There are certainly those that it won’t support in the long run, but as a long term plan that we can just about afford, it’s not a bad one – providing we don’t go back into a full lockdown, in which case it wouldn’t have anywhere near the efficacy.  But affordability will certainly be front and centre of his mind, and this morning we saw just how quickly the government are racking up the debt: In August alone the government had to borrow £35.9bn and since April they’ve had to borrow a whopping £173.7bn – which is £147bn more than they did over the same period in 2019. That consolidates our triple digit debt percentage and we haven’t owed so much as a percentage of GDP since 1960. Forecasts range from total government borrowing to be somewhere between £250bn and £380bn this year and it looks at the moment that we’re going to be tracking to the middle-upper range of that forecast, as tax receipts remain heavily supressed.

One key attribute of the chancellors’ new scheme is that it will enable employers to retain skilled workers. Taking the automotive industry, where figures yesterday showed output numbers are about 40% down on last year, as an example: shifts will be able to be reduced in length, but businesses should be able to retain workers on all shifts, rather than having to make brutally tough choices and let some teams go whilst keeping others at close to full hours. This can move right the way through the supply chain, with parts makers doing similar at one end and car dealerships at the other.

For those workers where jobs aren’t viable at even 33% of hours worked, we’re yet to hear what the government is doing to promote and develop new skills and opportunities. The government has urged people to look into alternative jobs and careers, but this hasn’t been backed up by them announcing any commitments to help get this done – case in point: The ‘National Retraining Scheme’ programme’s website was last updated in October 2019. Even though it’s not all down to the government, more needs to be done here.

In the markets, there does seem to be a risk-off theme emerging: US equities are markedly down from the summer months and the US dollar is regaining quite a bit of the value that it lost over July and August, as investors start to think about the real economic position (rather than the illusion through QE that everything was OK). In bond markets there have been large outflows from higher yielding corporate bonds, as people start to feel like the reward might not be worth the risk. Currently BB rated ‘junk bonds’ are returning about 4.4% per annum, which is significantly lower than their long term average and about a third of the yield they saw during the financial crisis, which speaks to the desperation of people searching anywhere for yield. This chart from the St Louis Fed illustrates the point.

Something that would go a long way to boosting markets would be another stimulus package from the US government. The Federal Reserve has said on multiple occasions that fiscal stimulus would be far more effective than their monetary policy efforts and the Democrats are crafting a proposal for a $2.2 trillion package that they’re hoping won’t get shot down immediately by their Republican counterparts. Nancy Pelosi has already said that she’s willing to negotiate with the White House on the measures. It’s been seven weeks since the last package expired and with Capitol Hill due to break for the elections in the near future, a vote could happen as early as next week. We won’t hold out too much hope though.

Today could be a quiet one, with the data of note from the UK having already been and gone. It’s all been a bit quiet on the Brexit front for the last day or two, so we may be overdue something there – hopefully positive, but we wouldn’t be surprised either way.

Have a great weekend.


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